On March 24, 2011 the Ninth Circuit Court of Appeals made it more difficult to bring a complaint claiming a violation of the Federal False Claims Act (FCA). The Court held that FCA complaints must not only “state with particularity the circumstances constituting fraud or mistake” (under Federal Rule of Civil Procedure 9(b)), but must “also plead plausible allegations” (under Federal Rule of Civil Procedure 8(a). In Mary Angela Cafasso v. General Dynamics C4 Systems, Inc. (March 24, 2011) 11 C.D.O.S. 3557 the Court upheld the dismissal of the plaintiffs’ False Claims Act complaint before trial because, although the “complaint alleges unsavory conduct … unsavory conduct is not, without more, actionable under the [False Claims Act].”
The Federal False Claims Act was enacted during the Civil War to protect against fraud by government contractors who were submitting inflated invoices and shipping faulty goods to the government. United States Code §§ 3729-3731 sets for specific circumstances that are violations of the FCA, including: 1. knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval; 2. knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim; or 3. conspiring to commit a violation …(31 U.S.C. § 3729(a)(A)-(C) (2010).) Each violation is punishable by civil penalties of $5,000 – $10,000 per violation, plus up to three times the amount of damage sustained by the government, and the cost of action. A violation can also cause a contractor to be suspended or debarred from further work for the federal government. Separate criminal statutes may also impose prison sentences for FCA violations. (See, i.e.,18 U.S.C. § 286.)
Before the Cafasso case, the Ninth Circuit Court of Appeals had made it easier to state a claim under the FCA. In Ebeib ex rel United States of America v. Lungwitz (Aug. 9, 2010) 616 F.3d 541, the Ninth Circuit joined other federal circuits “in recognizing a theory of implied certification under the FCA” based on the theory “that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment.” Even where the contract with the federal government did not require an express “certification of compliance” with every payment application (as some do), and even where the actual charges on the invoice were true and correct, “the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment” such that the failure to actually be in compliance with those federal rules is a violation of the FCA.
In the Cafasso case, however, the Court reminded would be FCA claimants that not every wrong is a false claim. The FCA allows private plaintiffs under certain conditions, referred to as “relators,” to prosecute FCA claims, referred to as “qui tam actions,” and retain certain amounts recovered in those actions (as further defined by statute). This case involved an employee who claimed that she discovered a FCA violation at her former company. She alleged that her former employer (the government contractor) wrongfully failed to notify the government of inventions developed by the company while under contract, which the government had a right to use for free and had a right for other companies working for the government to license the invention at a reasonable rate. She claimed that the impact was that the government may have to pay twice to use the same invention.
The Court looked at the facts alleged in the complaint, though, and failed to find a FCA violation. “[T]o commit conduct actionable under the FCA, one must, in some way, falsely assert entitlement to obtain or retain government money or property. … Cafasso’s complaint alleges no false claim.” Despite Cafasso’s position within the company and access to company records, she failed to identify a single false or fraudulent claim for payment, false record or statement, document certifying receipt of property, or any other qualifying false claim. The Court held even if the facts alleged in the complaint were true that the company “withheld disclosure of new inventions so it could continue to use them as trade secrets,” that the conduct “might be a breach of contract but not a fraudulent claim.” This “allegation, which identifies a general sort of fraudulent conduct but specifies no particular circumstances of any discrete fraudulent statement, is precisely what Rule 9(b) aims to preclude.”
The import of the Cafasso case to all litigants is that, for the first time, the Ninth Circuit has confirmed that for complaints that claim fraud or mistake, including FCA claims, must “state with particularity the circumstances constituting fraud or mistake” under Rule 9(b) and must “plead plausible allegations” under Rule 8(a). “Plausible allegations” raise a “reasonable expectation that discovery will reveal evidence” of the misconduct alleged. The import of the Cafasso case for FCA claimants is that although the Ninth Circuit has expanded FCA claims to include things such as “implied false certification,” claimants must nonetheless plead specific facts that fall within one of the statutory FCA categories, and that general allegations of fraud or wrongdoing will not suffice.